I started my career in finance and have been finance director of six companies, for periods ranging from five years to ten days. Over that time I noticed that the standard management tools, the ones you would learn at business school, are becoming blunter. They still have value, but they don't work as well as they used to. For the past couple of years I have been on a search for tools and techniques from other fields which can produce results where the conventional tools can't. Using these I now consult, speak and write on problems which can't be solved by normal means. I am author of the book Everything You Know About Business is Wrong and the forthcoming Out-think: Five Mental Manoeuvres for more Effective Action in Business and in Life.

Are You Missing The Opportunity To Take More Risks?

Let’s have a bet. I’ll toss a coin. Heads, I will give you $150. Tails you will give me $100. Would you take the bet? Most people won’t. The last time I tried this on an audience was in Rome two weeks ago, where I had about five takers out of a room of 80. Admittedly, the audience was general counsel of large organizations from across Europe, who may be more risk-averse than the average, but research has found that you need to offer a gain of two or three times the loss in order to get people to play.

Why is this? After all, it is mathematically an attractive bet. On average you will win (in mathematical language it has a positive expected value). It is what Nassim Taleb in his book Antifragile calls a convex risk, which he identifies as the source of nearly all human progress. Yet we avoid risks like this. My audience said no that evening, and would have said no the following day, and the day after that, and the day after that…Then after ten years they might meet an actuary who would explain that they had just said no to an almost certain $90,000.

Why do we do this? Why do we say no to what is clearly a good thing? (And let me confess that I, even though I know the answer that I am about to reveal, find it as hard as anyone). It is because we don’t calculate gains and losses mathematically, but weigh them psychologically. And the psychological pain of losing $100 weighs much more than the pleasure of winning $150. So we avoid these types of risk which could bring us so much good.

What can we do? We could just recognise that this type of risk is good but feels bad, grit our teeth and do it anyway. Alternatively, it might be easier to take a broader view. Instead of looking at each bet in isolation, look at it as part of a series which will, on average over time, produce value for us. Try to think more like a venture capitalist, book publisher or Hollywood studio. All these organizations are more or less cool with the idea that they need to finance a lot of flops to get the one in five, one in ten or one in one hundred success which will pay for all the others. Take more properly calculated risks and the law of large numbers will, inevitably and inexorably, start to work in your favour.

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